DEBT SOLUTIONS
Bankruptcy
DEBT SOLUTIONS
Bankruptcy
What is bankruptcy?
Bankruptcy is a legally binding debt solution which allows residents in England, Wales and Northern Ireland who are unable to repay their debts to write off everything they owe.
Bankruptcy is a formal debt relief solution in England, Wales and Northern Ireland that might be of benefit if you’re unable to pay back the unsecured debts you owe in a reasonable amount of time. It is usually considered to be a last resort and will have a serious impact on your credit rating.
The bankruptcy process involves the transfer of assets and property to a supervisor who will manage the arrangement and liaise with creditors to cover the cost of repayments. Once you enter into bankruptcy your creditors will no longer be able to contact you or take further legal action to reclaim what you owe.
How does bankruptcy work?
Bankruptcy typically lasts for one year, at the end of which any remaining debts are written off. However, you may also be required to make a monthly payment towards your debts for up to three years if you are deemed to have affordability from your income.
There are several ways in which you can find yourself being made bankrupt. You can apply for bankruptcy yourself at the cost of £680, or one or more of your creditors can petition to make you bankrupt.
Applications in England and Wales are made to the Insolvency Service while in Northern Ireland these applications are handled by the high court. Creditors can apply to have someone made bankrupt if they owe £5,000 or more.
What happens if I declare bankruptcy?
Going bankrupt should only be considered a viable option if you have no access to income, no valuable assets, and are struggling with debts you simply cannot pay.
By declaring bankruptcy, you are agreeing to give up everything you own and make a fresh start. Your assets and property, including your home, will be put towards your debts and placed in the hands of the official receiver – an official from the Insolvency Service who will manage your bankruptcy.
Going bankrupt typically takes 12 months, after which you will be discharged. During that 12 months, you won’t be able to:
- Borrow more than £500 without informing the lender of your bankruptcy
- Open a bank account without the permission of the official receiver
- Be the director of a company
What is a bankruptcy order?
The most common way of going bankrupt is for the individual to begin bankruptcy proceedings and declare themselves bankrupt. However, if you owe money to third parties and they don’t believe you have the means, or the will, to pay your debts, they can also apply to make you bankrupt.
A bankruptcy order is is the process by which creditors can apply to the court to make you bankrupt. If you disagree with your creditors’ position and don’t want to be made bankrupt, you must seek legal advice at this stage, as it is possible to oppose a bankruptcy petition.
If you are ready to make a fresh start, on the other hand, you should take no action. Any creditor who takes out a bankruptcy order against you will have to pay for your bankruptcy if their bankruptcy petition is granted by the court, allowing you to make a fresh start without the associated costs.
Am I eligible for bankruptcy?
Opting for bankruptcy shouldn’t be taken lightly and there are strict criteria for those who are interested. To be eligible for bankruptcy you must meet the following conditions:
- Your unsecured debt is more than your assets
- You have little or no additional income but are unable to repay what you owe
- Your circumstances are unlikely to change
- You aren’t able to repay your debts as and when they fall due
Applying for bankruptcy
Step 1: Getting debt advice
Bankruptcy should always be considered a last resort. As such, before beginning the bankruptcy process, it’s a good idea to speak with an expert money adviser who can explain all of the options available.
Step 2: Applying to the Insolvency Service
You can apply for bankruptcy online by filling out the application in your own time. This will then be reviewed by someone who works at the Insolvency Service called an ‘adjudicator’.
They’ll then decide if you should be made bankrupt. Bankruptcy also comes with a fee – in England and Wales this is £680 and in Northern Ireland it is £699. This fee can be paid in instalments, however, this must be complete before you can submit your petition.
Step 3: Making an Income Payments Agreement
If the adjudicator accepts your application and declares you bankrupt your bank and/or building society accounts will be frozen immediately and your case will be assigned to an official receiver. They will take control of your money and possessions and decide which of your assets should be sold.
Based on your affordability, the official receiver will also decide whether you will have to make monthly payments towards your debts. This is known as an Income Payments Agreement, and will only be applied if you have enough income to make payments towards your debts.
As soon as your bankruptcy begins, details of your bankruptcy order will be recorded on the Individual Insolvency Register.
Step 4: Cooperating with the official receiver
As you enter into your bankruptcy you will be interviewed by the official receiver. They will become responsible for realising any funds from your estate and distributing them to your creditors.
Once you have been declared bankrupt your creditors will no longer be able to pursue you directly for any money you owe – all correspondence will go through the receiver. You will also have to open a new bank account for wages and living expenses.
There are also strict restrictions in bankruptcy. You will be unable to dispose of assets or get more than £500 of credit without permission and you cannot be a company director.
Step 5: Being discharged from your bankruptcy
Providing you’ve cooperated with your receiver, you will be discharged from bankruptcy after 12 months and your debts will be written off (subject to some exclusions).
We’d suggest that you request a letter of discharge in case you need proof of this later. If you’ve been making monthly contributions towards your debt, you may be required to continue to make these for a further two years following your discharge.
Your bankruptcy will negatively impact your credit score and remain on your file for six years from the time it began.
Advantages of bankruptcy
- Bankruptcy allows you to write off your debt in 12 months
- Creditors can no longer contact you directly for payment and must communicate through the official receiver
- You will be able to keep enough money to live on, as well as essential possessions required for basic domestic needs
- You can keep any items vital for trade work if you’re self employed
- If your home has little equity in it, the official receiver may allow to you to keep it
- If deemed essential for work, and worth £1,000 or less, you’ll be allowed to keep a vehicle
Disadvantages of bankruptcy
- Bankruptcy will have a negative affect on your credit report and remain there for at least six years after you have been discharged.
- Your home will likely be sold if there is more than £1,000 of equity.
- Vehicles over the cost of £1,000 may be sold, however, if a friend or relative pays the difference then it is possible to keep.
- Bankruptcy can affect your profession. You will be unable to work as a company director or be involved with the management of a limited company while you are bankrupt. It may also affect the ability to practice as a solicitor or accountant or in other financial services.
- There’s a cost attached to bankruptcy which many people cannot afford.
- If you become bankrupt, it can affect your ability to become a British Citizen as a ‘person of independent means’
How much does bankruptcy cost in the UK?
In order to go bankrupt you must pay money to cover application fees and administration costs. The cost breakdown of bankruptcy is as follows:
England and Wales
- £550 bankruptcy deposit
- £130 application fee
Northern Ireland
- £525 bankruptcy deposit
- £151 court fee
- Solicitor’s fee – usually less than £10 depending on your solicitor
In Scotland, bankruptcy is known as sequestration it costs £200 to apply. You can find out more about sequestration here.
Do you get out of all debts if you declare bankruptcy?
Bankruptcy will allow you to transfer the responsibility for most of your debts onto the official receiver, however not every kind of debt can be included in bankruptcy proceedings.
Debts that aren’t covered by bankruptcy include:
- Court fines
- Child maintenance payments
- Student loans
- Social fund loans
- Mortgages or any other debt secured against your home
Any debts you aren’t able to include in your bankruptcy will remain your responsibility. Your creditors will expect you to continue to make payments alongside your bankruptcy, even if your bankruptcy is subject to an Income Payments Agreement.
Can I declare bankruptcy as a business owner?
Declaring bankruptcy as a business owner has huge implications on the business, as the business and and all associated assets will be handed over to the official receiver. While each bankruptcy case is taken on its own merits, this typically means:
- The business will close
- Its assets will be sold
- The company bank account(s) will be shut down
- All employees will lose their jobs
If you run your own business but are self-employed, you may be able to continue trading even as you go bankrupt, but you will find it difficult to access new lines of credit, which may make it tricky for you to continue operating.
What if I need more debt advice and information on bankruptcy?
Bankruptcy can be a fresh start for people who owe a lot of money and have no realistic prospect of repaying their creditors. But it should also be viewed as a last resort.
As soon as you undertake bankruptcy, restrictions are placed on your life. Any money and assets you carry are no longer your own, and will be handed over to the official receiver to help you make payments towards your debts.
If you are experiencing money trouble and are considering bankruptcy as an option, get free debt advice before you go any further. Carrington Dean’s debt advisers are experts in Bankruptcy (Sequestration in Scotland) and can help you make an informed decision.
Frequently Asked Questions
Typically, bankruptcy lasts for 12 months from the date the court made you bankrupt; however, this can be extended if you don’t comply with the terms of your bankruptcy. Your circumstances may also require you to contribute monthly payments for up to two years after you are discharged.
If you fail to comply with the terms of a payment agreement, a creditor can petition for bankruptcy. If you receive a call or letter informing you that a creditor intends to do this, you should seek professional advice straight away.
If you’re unable to repay your debts, you have the option of beginning bankruptcy proceedings. You can apply via an online application to an adjudicator.
Although you will unlikely be able to maintain an existing bank account after bankruptcy, many banks will provide a basic account service that allows you to deposit and withdraw cash. In some cases, if you have a joint account and one of the account holders has been declared bankrupt, the bank may insist on that account being closed and both of you opening a new account.
This depends on a number of different factors, including if your property has any equity in it. If the house is worth a considerable amount more than when you first purchased it, you may have to sell it to release money for creditors. There are potentially other ways to realise the value which may not require an outright sale. You should seek expert advice on your own situation.
Although your assets must be sold to pay your bankruptcy debts, you are usually allowed to keep items you need for work such as tools or a vehicle (depending on the value of the vehicle, you may have to sell it for a cheaper model). You are entitled to keep personal items such as clothing, bedding and furniture. However, if you have valuable jewellery, antiques, art or other vehicles, these will be considered as assets which can be sold.
Bankruptcy has a serious effect on your credit rating as it stays on your credit file for six years. You may need to make sure that records of the main UK credit reference agencies are updated once you’re discharged so you can regain access to credit. It can be difficult to secure a mortgage or other loan after a bankruptcy.
It depends on your job or profession and terms of employment. In many cases you can continue working as normal. However, there are certain employers and professions that place restrictions on the employment of people who are in bankruptcy. These include the legal and accounting professions as well as the police, armed forces and members of parliament.
Your name will be included on a register held by the Insolvency Service, which is publicly available. However, only limited details are shown and someone would have to actively search for you by name to find any information. In the past, newspapers published details of bankruptcies but this is a rare occurrence now.
You should talk to your trustee about your particular pension circumstances as the rules vary according to the kind of pension you have. Your state pension is not considered part of the bankruptcy estate, but it will be used as income when determining whether you should make monthly payments towards your bankruptcy. If you have a personal pension that has been approved by HM Revenue and Customs, it will not be included as an asset. Even if this is not the case, you may still be able to obtain permission for a personal pension to be excluded. However, if your pension is included as part of the bankruptcy estate, the Official Receiver or trustee is able to claim all or part of it, even after you have been discharged from bankruptcy.
You won’t be able to borrow more than £500 while you’re bankrupt unless you disclose this to the lender. What’s more, you can’t be a company director or set up or manage a company without the court’s permission. Nor can you run a business under another name without telling people you trade with that you are bankrupt.
No, not all debt is written off. There are some exclusions, including debt arising from fraud, child support and alimony, student loans, court fines and personal injury fines.